March 29, 2000

Costco Brings Its Big Box Onto the Web, but Cautiously

By JON CHRISTENSEN

SSAQUAH,
Wash. -- How can a company shoehorn the quintessential big-box shopping
experience onto the small screen of online shopping?

Chris Maynard for The New York Times

A sign, above, at the Costco store in Bay Ridge,
Brooklyn, advertises the
company's online pharmacy.

Carefully, if the Costco Wholesale Corporation, the chain of enormous and enormously successful warehouse stores, is any
guide.

While its competitors have taken high-profile plunges into e-commerce -- Wal-Mart Stores Inc. is spinning off Walmart
.com with the venture capital firm Accel
Partners, and Kmart has an online venture
with Yahoo called Bluelight.com -- Costco is
sticking to a slow but steady do-it-yourself
strategy on the Web.

Costco.com went online with little fanfare
in late 1998. The company wanted to quietly
test how customers would use the Web site.
It quickly discovered how lucrative e-commerce could be. The site generated $15
million in sales last fiscal year. This year,
Costco expects to sell about $95 million
worth of products online. That is about what
each of the company's 320 stores sells each
year, on average. But within five years, the
company projects online revenues to be $500
million to $1 billion a year, the equivalent of
5 to 10 stores' sales, at a fraction of the cost
to build and operate.

Admittedly, that is still a tiny part of
Costco's overall sales, which are expected
to be around $30 billion this year. Roughly
the same proportions can be applied to
retail sales in general in the United States:
only 1 percent occur on the Internet. But the
number is growing 200 percent to 300 percent a year, as in the case of Costco. The
growing success of its Web site is challenging Costco's executives to think about how
the big box and the small screen can best
work together.

"The challenge when they go online is to
figure out who they are," said George
Strachan, a financial analyst for Goldman,
Sachs in New York. "On land everyone
knows who they are."

Chris Maynard for The New York Times

Costco shoppers examine fresh
flowers, and appliances, both of which also are
also sold on Costco's Web site.

At first glance, Costco seems well poised
to blend clicks and mortar. Eighteen million
members pay $35 a year to shop at Costco,
whether in stores or online, and that includes 3.9 million small businesses and nonprofit organizations, 78 percent of which
already use the Internet. And the Web could
be another tool for what Costco does best:
lower costs to lower prices.

On the other hand, Costco has made a
huge effort in recent years to lure customers into its stores more often. Customers
used to visit the stores, on average, every
four to eight weeks to stock up on bulk
supplies, like toilet paper, gallons of olive oil
and tubs of peanut butter. Costco has added
fresh fruits and vegetables, fresh-baked
bread, meat and even sushi to encourage
more visits. It has worked. Customers now
visit a Costco about every two to four
weeks. About one million people a day shop
at Costcos in the United States, Britain,
Canada, Japan, Korea, Mexico and Taiwan.

Costco does not want these customers to
drift away to the Web, however, where
everything is a click away, including the
Costco competitors that are selling the
same products at lower prices.

At the same time, the Web site must
succeed on its own, Richard Galanti, Costco's chief financial officer, said in an interview at the company's headquarters here in
the suburbs of Seattle. "We're taking the
novel approach -- to make money at it," Mr.
Galanti said. During the recent holidays, he
went on, buyers for Costco sometimes
purchased consumer electronics from competitors who were selling items below cost.
Costco then resold these items on Costco
.com, adhering to the company's modus
operandi of never selling at a loss and never
charging more than a 14 percent markup.

Mr. Galanti said top executives at the
company had rallied around the site. But at
first, James D. Sinegal, a Costco founder
and its chief executive, had to be persuaded
that the Web was more than an interesting
but expensive bauble to adorn and perhaps
distract from the on-land business.

Bob Craves, another founder of the company, was put in charge of e-commerce. Mr.
Craves likes to joke about being an old-fashioned merchandiser and a klutz when it
comes to technology. And he used a traditional retailing gimmick to jump-start the
Web site. Last fall, customers in stores were
offered 18 eggs in exchange for their e-mail
addresses; one million signed up. By the
holidays, the site was generating steady
sales, especially of jewelry, electronics and
computers. To keep the momentum going,
coupons for online sales were included in a
booklet mailed to members in January.

There are about 1,800 items for sale on the
site. And there is growing overlap with
items in the stores, although Costco executives are still wary of cannibalizing the
stores. Many products are more expensive
versions of products sold in the stores.

This summer, the company plans to add
thousands of office-supply items, but like
almost all of the products sold online, they
will be shipped directly from suppliers to
online customers. Delivering shipments of
mixed items nationwide will require Costco
to dedicate some warehouse space to picking and packing goods for Web customers.

For ordinary Costco shoppers, tacking on
delivery costs to bulk purchases could cut
into savings they might reap in loading up
their own cars at real stores.

Chris Maynard for The New York Times

In-store shoppers still account for the overwhelming
majority of Costco's total sales,
which are expected to reach $30
billion this year.

On the Web, Costco has tried to replicate
the experience of shopping at its warehouse
stores. "We consciously made it bare
bones," Mr. Galanti said. "It's like going
into Costco."

But entering Costco.com is a markedly
underwhelming experience compared with
entering a Costco warehouse store. The first
thing a visitor sees on the Web is a row of
tiny pictures of special items for sale: Zip
drive disks, a Pokémon pinball machine and
a heart-shaped diamond pendant, among
other things. This is an effort to mimic what
Costco calls the fence, oversize displays that
shoppers must pass upon entering a store.

In real life, the fence looks much larger.
Inside the Costco warehouse across the
street from corporate headquarters, hundreds of rosebushes and giant stacks of
Miracle-Gro greeted customers one recent
rainy afternoon, the display assaulting the
senses. By contrast, the tiny signs promoting the Web site are barely noticeable. Customers seem to know about the site. But
they prefer to shop in the store, even if it
means driving through a downpour.

"Generally, online, I'm looking for one
thing," said Tom Conran, who was shopping
with his wife, Marlene. "I know what I want
and I go find it. Here we want this, but get
that. It's more spontaneous." Mr. Conran
was there to buy a walkie-talkie that was
advertised online at $49.99. Even though he
had to pay $10 more for the walkie-talkie at
the store, he felt it was worth it because he
wanted it right away. Mr. Conran and his
wife left the store pushing two carts piled
high, having spent $565.95.

Another shopper, Daniel Higgins, was
browsing the jewelry cases to buy a gift for
his wife's birthday. He knew that Costco
sold jewelry online. "I'm a brick-and-mortar guy," he said. "Jewelry is an intimate
purchase. I would rather see it and touch it."

Costco executives have discussed putting
kiosks in stores with computers connected
to the Web site. But Mr. Galanti said they
were worried that they might be distracting.

If Costco is anything, it is cautious about
messing with a proven formula for success:
getting customers into the warehouses.

Surprisingly, perhaps, financial analysts
like Mr. Strachan of Goldman, Sachs, who
follow the company's traditional fortunes,
and e-commerce analysts who focus on future prospects, like Seema Williams of Forrester Research in Cambridge, Mass., approve of Costco's caution.

"It's not beautiful, but it's a start," Ms.
Williams said, after reviewing Costco.com.
She said she shopped at Costco "like a mad
person once a quarter to stock up on everything. Toilet-paper rolls, cat food, socks,
pants, you can find most everything there,"
she said. "I would be delighted if they sold
everything online."

The only rub is that Costco would like to
get Ms. Williams into the store more often,
not less.

Jon Christensen covers business and the
environment from Carson City, Nev.